An artificial intelligence (AI) frenzy has swept the markets since Nvidia (NASDAQ:NVDA) reported strong earnings guidance in the first quarter. While it’s easy to get excited about high returns and the technology’s impact on revenue growth, some AI stocks have become overvalued.
Some stocks ride the trend and end up disappointing shareholders. The AI boom has similar hype as cryptocurrencies, and it is a cautionary tale. In 2017, a beverage maker’s stock surged by over 200% after the company announced it would pivot to blockchain.
Fortunately, the AI boom isn’t the same story as the crypto boom. Artificial intelligence is a valuable technology that is an essential building block for many companies. Chatbots, personalized product recommendations and ChatGPT rely on artificial intelligence.
AI chip stocks can generate strong returns for investors as the technology gains momentum. While some AI chip stocks are flying too close to the sun, these three undervalued AI chip stocks look promising.
Qualcomm (QCOM)
Qualcomm (NASDAQ:QCOM) has been a laggard in the AI chip space. Shares are only up by 23% compared to the big gains from other AI chip companies. Qualcomm’s 14 P/E ratio looks more reasonable than other AI chip companies, and investors get a 2.40% dividend while waiting.
Shares have not performed well over the past year and are down by roughly 10% during that time. Qualcomm reported year-over-year (YOY) revenue and earnings declines in the first quarter, but artificial intelligence chips can help the stock get back on the right track.
The company’s valuation is so low relative to other companies that it may not need a big increase in revenue and earnings to reward shareholders. Qualcomm shares are down by 30% from their all-time highs.
Q2 earnings get reported on August 2nd and will provide a better snapshot of the company’s financial status. If those numbers are good, the company’s P/E ratio can increase and bring the stock up with it.
ASML (ASML)
ASML (NASDAQ:ASML) is a global semiconductor leader that features a 34 P/E ratio and a 28% year-to-date gain. The company has been doing well and recently raised its full-year guidance.
The company reached €6.9 in revenue in the second quarter, marking a 27.1% YOY improvement. Net income also jumped by double-digits year-over-year.
Although CEO Peter Wennink mentioned customers have been getting cautious due to macroeconomic conditions, ASML has a €38 billion backlog. The company also repurchased roughly €500 million worth of shares in the second quarter.
The firm has healthy profit margins and can compete with the other top AI chipmakers. However, the company’s shares haven’t experienced the same level of success as its peers this year. That can soon change.
Taiwan Semiconductor Manufacturing Company (TSM)
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is on this list for the same reasons Qualcomm made the list. While other AI chipmakers have surged, TSMC has been held back by slower earnings and revenue growth.
The slowdown has helped the stock reach a more reasonable valuation. Shares currently trade to the tune of a 17 P/E ratio. The company’s AI chips have been gaining traction, and it has a big list of customers, including Broadcom (NASDAQ:AVGO), Nvidia and AMD (NASDAQ:AMD).
TSMC is expected to reaccelerate its revenue growth in the coming quarters due to the rising demand for AI chips. That development can ignite a spark in a reasonably valued company that is one of the leaders in the semiconductor industry.
On this date of publication, Marc Guberti held long positions in QCOM and ASML. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.